Pension Reform and Capital Market Development ¤Feasibility and ¤Impact Preconditions

Abstract

Private pension funds are neither necessary nor sufficient for capital market development. But if they are subject to conducive regulations, adopt optimizing policies, and operate in a pluralistic structure, and when they reach critical mass, they can have a large impact on capital market modernization and development. Abstract The link between pension reform and capital market development has become a perennial question that is raised every time the potential benefits and preconditions of pension reform are discussed. This paper asks two questions. First, which are the basic " feasibility " preconditions for the successful launching of a pension reform program? And, second, which are the necessary " impact " preconditions for the realization of the potential benefits of funded pension plans for capital market development. The main conclusion of the paper is that the " feasibility " preconditions are not as demanding as it is sometimes assumed. In contrast, the " impact " preconditions are more onerous. The most important " feasibility " precondition is a strong and lasting commitment of the authorities to maintain macrofinancial stability, to foster a small core of solvent and efficient banks and insurance companies, and to create an effective regulatory and supervisory agency. Opening the domestic banking and insurance markets to foreign participation can easily fulfill the second requirement. The main " impact " preconditions include the attainment of critical mass, the adoption of conducive regulations, especially on pension fund investments, the pursuit of optimizing policies by the pension funds, and the prevalence of pluralistic structures.